Doing Better, Spending Less
At the time, nonprofit HMOs like Kaiser and Group Health had an admirable record of lower cost and better outcomes than traditional fee-for-service health care. Only 19 percent of total health care spending in the U.S. is spent on inpatient services — among the lowest proportion of similar countries. The International Monetary Fund and the World Bank now project 3 percent and 2.5 percent reductions in GDP in 2020 in developing economies, respectively. The corresponding impact on health budgets is likely to be significant because economic growth has historically been the main determinant of real increases in health spending, on average across a large pool of countries. The federal government would limit the fees paid to doctors, hospitals, and prescription drug manufacturers, which would help lower the program’s costs, compared with what it would be otherwise. In addition, the system would be simpler than our current “patchwork” system, so the administrative costs of running the program would be lower than in most private insurance plans; this also helps offset some of the new costs.
The prices assigned for Diagnosis Related Grouping (DRG–for inpatients) and the corresponding Danish Ambulant Grouping System (DAGS–for outpatients) are average cost rates assigned to a treatment type. Costs for hospital admissions stretching across more than one three-month period were divided proportionally dancing drums into the time intervals. This includes spending by all types of financing arrangements (such as government-based programmes, social insurance and out-of-pocket spending) on medical services and goods, population health and prevention programmes, as well as administration of the health system.
This myth also motivates some health care organizations to expand through mergers, acquisitions, and organic growth in order to reap economies of scale by spreading their fixed costs over an increased volume of business. The widespread confusion between what a provider charges, what it is actually reimbursed, and its costs is a major barrier to reducing the cost of health care. Providers have aggravated this problem by structuring important aspects of their costing systems around the way they are reimbursed. In the U.S., this is partly a historical artifact of the Medicare cost-plus reimbursement system, which requires hospital departments to prepare an annual Medicare Cost Report , detailing costs and charges by department.
They instruct their secretary to have patients who call with follow-up questions schedule an appointment, because insurers don’t pay for phone calls, only office visits. They take a Doppler ultrasound course, buy a machine, and start doing their patients’ scans themselves, so that the insurance payments go to them rather than to the hospital. They figure out ways to increase their high-margin work and decrease their low-margin work. He knew of doctors who owned strip malls, orange groves, apartment complexes—or imaging centers, surgery centers, or another part of the hospital they directed patients to. They were innovative and aggressive in finding ways to increase revenues from patient care. But he had often seen financial considerations drive the decisions doctors made for patients—the tests they ordered, the doctors and hospitals they recommended—and it bothered him.
But decades ago Mayo recognized that the first thing it needed to do was eliminate the financial barriers. It pooled all the money the doctors and the hospital system received and began paying everyone a salary, so that the doctors’ goal in patient care couldn’t be increasing their income. Mayo promoted leaders who focussed first on what was best for patients, and then on how to make this financially possible. Then there are the physicians who see their practice primarily as a revenue stream.
Value in health care is measured in terms of the patient outcomes achieved per dollar expended. It is not the number of different services provided or the volume of services delivered that matters but the value. It is not surprising that the United States has higher prices than poorer countries. The Balassa-Samuelson effect notes that high-income countries have higher prices for non-traded goods and services than low-income countries (Balassa 1964; Samuelson 1964). But the Balassa-Samuelson effect does not predict much variation among high-income countries, and yet the United States is clearly at the upper end of the price distribution for health care. Self-reported health is a well-established summary measure of a person’s health that reliably correlates with objective health measures like laboratory biomarkers (Schanzenbach et al. 2016).
Rather than developing and maintaining accurate costing systems that are based on actual resource usage, separate from the regulatory standard required for reimbursement, hospitals defaulted to reimbursement-driven systems. Health-care providers have become a larger share of the labor force, rising from 5.0 percent of employment in 1980 to 8.5 percent in 2019 (BLS 1980–2019b and authors’ calculations). In figure 11a, we show the rate of medical residency positions per 100,000 U.S. residents that were available over the last 60 years.
Costs of prescription drugs and primary care over the last five years of life peaked when death occurred around age 80 years and decreased in those dying at older age. The confidence intervals were calculated by using bootstrapping methods 1000 times. Most steps for the estimation were completed for each bootstrap sample, and 1000 spending estimates were created for each health condition, age group, sex, type of care, payer, and year. Bootstrapping methods assume that the empirical distribution of the errors in the sample data approximates the population’s distribution. Although this method has strengths, this assumption may not always be true, especially for rare health conditions. Comparing practices across different countries for the same condition also reveals major opportunities for improvement.
This increase comes from the rising shares of the population enrolled in Medicare, Medicaid, state Children’s Health Insurance Programs, and veterans’ health benefits. Policy changes like the introduction of the Medicare prescription drug benefit in 2006 and a major expansion of Medicaid eligibility in 2014 played important roles. At the same time, spending on discretionary programs like education and research and development have decreased as a share of GDP . If health expenditures continue to increase as a share of government spending, the increase will eventually necessitate either tax increases or reduced spending on other important government functions like public safety, infrastructure, research and development, and education. Commissions can help monitor the effects of price regulations and adapt regulations accordingly to adjust for payments occurring outside of traditional current procedural terminology or DRG bases.
From 2018, Statistics Denmark has data on the total sum spent by each municipality on home care and residential care respectively. We used these data, combined with data on hours on home care delivered and days spent in residential care to estimate how the price of one day in residential care compared to the price of one hour of home care. Assuming this number to be constant across the period, we can estimate the cost of one day of residential care using the data on costs of home care described above. For hospital costs, the data used was the DRG-grouped National Patient Register which has information on all in- and out-patient somatic and psychiatric hospital contacts in Denmark.
Among those who report excellent health, even those at the 90th percentile of expenditures incur only $5,780 in annual spending, not far above the average of $2,350 for that group. On the other end of the spectrum, people who report being in poor health have average health-care expenditures of $26,450. In the United States, life expectancy at birth is the lowest of the countries in figure 2; maternal and infant mortality are the highest . Certainly, other non-health-care factors contribute to these outcomes, but poor U.S. performance stands in striking contrast to its high spending on health care . Spending on U.S. health care has grown steadily, rising from $2,900 per person in 1980 to $11,200 per person in 2018 —a 290 percent increase . That growth has slowed at times, as in the mid- to late 1990s and early 2010s, but since 1980 it amounts to annualized growth in real per capita spending of 3.6 percent.
We map those processes as we did in step 3 and then calculate and assign costs to patient-facing resources on the basis of their demands for the services of these departments, using the process that will be described in step 6. Next we prepare detailed process maps for each activity in the care delivery value chain. Process maps encompass the paths patients may follow as they move through their care cycle.
Because uninsured patients are disproportionately served by safety-net facilities, which serve relatively low proportions of privately insured patients (Gaskin and Hadley, 1999a,b; Lewin and Altman, 2000; IOM, 2003a), the opportunity for cross-subsidy is limited. Using the example of South Carolina, about seven-eighths of the private subsidies for uninsured care from nongovernmental sources came from philanthropies and other hospital revenue, while the remaining one-eighth came from surpluses generated from private-pay patients . In low- and middle-income countries, new data suggest that more than half of health spending is devoted to primary health care. Yet less than 40% of all spending on primary health care comes from governments. One way to look at health spending is to use the Quarterly Services Survey data.
In most countries with market economies, the market for healthcare is only one of many markets competing for the same resources; because of this the prices for healthcare services are affected by productivity changes in other markets. The graph from Culyer and Newhouse shows that in the U.S., over the course of the 20th century the growth in the consumer price index for all goods and services was lower than the growth in the medical consumer price index . You can read more about the composition of the bundle of goods and services measured in the CPI and their relationship to GDP deflators in our entry on GDP data.
The prices assigned for Diagnosis Related Grouping (DRG–for inpatients) and the corresponding Danish Ambulant Grouping System (DAGS–for outpatients) are average cost rates assigned to a treatment type. Costs for hospital admissions stretching across more than one three-month period were divided proportionally dancing drums into the time intervals. This includes spending by all types of financing arrangements (such as government-based programmes, social insurance and out-of-pocket spending) on medical services and goods, population health and prevention programmes, as well as administration of the health system.
This myth also motivates some health care organizations to expand through mergers, acquisitions, and organic growth in order to reap economies of scale by spreading their fixed costs over an increased volume of business. The widespread confusion between what a provider charges, what it is actually reimbursed, and its costs is a major barrier to reducing the cost of health care. Providers have aggravated this problem by structuring important aspects of their costing systems around the way they are reimbursed. In the U.S., this is partly a historical artifact of the Medicare cost-plus reimbursement system, which requires hospital departments to prepare an annual Medicare Cost Report , detailing costs and charges by department.
They instruct their secretary to have patients who call with follow-up questions schedule an appointment, because insurers don’t pay for phone calls, only office visits. They take a Doppler ultrasound course, buy a machine, and start doing their patients’ scans themselves, so that the insurance payments go to them rather than to the hospital. They figure out ways to increase their high-margin work and decrease their low-margin work. He knew of doctors who owned strip malls, orange groves, apartment complexes—or imaging centers, surgery centers, or another part of the hospital they directed patients to. They were innovative and aggressive in finding ways to increase revenues from patient care. But he had often seen financial considerations drive the decisions doctors made for patients—the tests they ordered, the doctors and hospitals they recommended—and it bothered him.
But decades ago Mayo recognized that the first thing it needed to do was eliminate the financial barriers. It pooled all the money the doctors and the hospital system received and began paying everyone a salary, so that the doctors’ goal in patient care couldn’t be increasing their income. Mayo promoted leaders who focussed first on what was best for patients, and then on how to make this financially possible. Then there are the physicians who see their practice primarily as a revenue stream.
Value in health care is measured in terms of the patient outcomes achieved per dollar expended. It is not the number of different services provided or the volume of services delivered that matters but the value. It is not surprising that the United States has higher prices than poorer countries. The Balassa-Samuelson effect notes that high-income countries have higher prices for non-traded goods and services than low-income countries (Balassa 1964; Samuelson 1964). But the Balassa-Samuelson effect does not predict much variation among high-income countries, and yet the United States is clearly at the upper end of the price distribution for health care. Self-reported health is a well-established summary measure of a person’s health that reliably correlates with objective health measures like laboratory biomarkers (Schanzenbach et al. 2016).
Rather than developing and maintaining accurate costing systems that are based on actual resource usage, separate from the regulatory standard required for reimbursement, hospitals defaulted to reimbursement-driven systems. Health-care providers have become a larger share of the labor force, rising from 5.0 percent of employment in 1980 to 8.5 percent in 2019 (BLS 1980–2019b and authors’ calculations). In figure 11a, we show the rate of medical residency positions per 100,000 U.S. residents that were available over the last 60 years.
Costs of prescription drugs and primary care over the last five years of life peaked when death occurred around age 80 years and decreased in those dying at older age. The confidence intervals were calculated by using bootstrapping methods 1000 times. Most steps for the estimation were completed for each bootstrap sample, and 1000 spending estimates were created for each health condition, age group, sex, type of care, payer, and year. Bootstrapping methods assume that the empirical distribution of the errors in the sample data approximates the population’s distribution. Although this method has strengths, this assumption may not always be true, especially for rare health conditions. Comparing practices across different countries for the same condition also reveals major opportunities for improvement.
This increase comes from the rising shares of the population enrolled in Medicare, Medicaid, state Children’s Health Insurance Programs, and veterans’ health benefits. Policy changes like the introduction of the Medicare prescription drug benefit in 2006 and a major expansion of Medicaid eligibility in 2014 played important roles. At the same time, spending on discretionary programs like education and research and development have decreased as a share of GDP . If health expenditures continue to increase as a share of government spending, the increase will eventually necessitate either tax increases or reduced spending on other important government functions like public safety, infrastructure, research and development, and education. Commissions can help monitor the effects of price regulations and adapt regulations accordingly to adjust for payments occurring outside of traditional current procedural terminology or DRG bases.
From 2018, Statistics Denmark has data on the total sum spent by each municipality on home care and residential care respectively. We used these data, combined with data on hours on home care delivered and days spent in residential care to estimate how the price of one day in residential care compared to the price of one hour of home care. Assuming this number to be constant across the period, we can estimate the cost of one day of residential care using the data on costs of home care described above. For hospital costs, the data used was the DRG-grouped National Patient Register which has information on all in- and out-patient somatic and psychiatric hospital contacts in Denmark.
Among those who report excellent health, even those at the 90th percentile of expenditures incur only $5,780 in annual spending, not far above the average of $2,350 for that group. On the other end of the spectrum, people who report being in poor health have average health-care expenditures of $26,450. In the United States, life expectancy at birth is the lowest of the countries in figure 2; maternal and infant mortality are the highest . Certainly, other non-health-care factors contribute to these outcomes, but poor U.S. performance stands in striking contrast to its high spending on health care . Spending on U.S. health care has grown steadily, rising from $2,900 per person in 1980 to $11,200 per person in 2018 —a 290 percent increase . That growth has slowed at times, as in the mid- to late 1990s and early 2010s, but since 1980 it amounts to annualized growth in real per capita spending of 3.6 percent.
We map those processes as we did in step 3 and then calculate and assign costs to patient-facing resources on the basis of their demands for the services of these departments, using the process that will be described in step 6. Next we prepare detailed process maps for each activity in the care delivery value chain. Process maps encompass the paths patients may follow as they move through their care cycle.
Because uninsured patients are disproportionately served by safety-net facilities, which serve relatively low proportions of privately insured patients (Gaskin and Hadley, 1999a,b; Lewin and Altman, 2000; IOM, 2003a), the opportunity for cross-subsidy is limited. Using the example of South Carolina, about seven-eighths of the private subsidies for uninsured care from nongovernmental sources came from philanthropies and other hospital revenue, while the remaining one-eighth came from surpluses generated from private-pay patients . In low- and middle-income countries, new data suggest that more than half of health spending is devoted to primary health care. Yet less than 40% of all spending on primary health care comes from governments. One way to look at health spending is to use the Quarterly Services Survey data.
In most countries with market economies, the market for healthcare is only one of many markets competing for the same resources; because of this the prices for healthcare services are affected by productivity changes in other markets. The graph from Culyer and Newhouse shows that in the U.S., over the course of the 20th century the growth in the consumer price index for all goods and services was lower than the growth in the medical consumer price index . You can read more about the composition of the bundle of goods and services measured in the CPI and their relationship to GDP deflators in our entry on GDP data.
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